Expensing. Businesses can elect to expense (deduct immediately) the cost of most new equipment up to a fixed amount. For 2007, expensing is allowed up to $125,000 (subject to a dollar-for-dollar reduction in that $125,000 for such purchases over $500,000). To get the benefit for a tax year beginning in 2007, the equipment should be put into use before the end of that tax year. 

Note: Many states have not matched these amounts and therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.

Timing. If you intend to purchase business equipment this year, the proper timing of purchases might, in some cases, actually increase the tax benefit you gain from depreciation of that equipment. Here’s a simplified explanation:

Conventions. The tax rules for depreciation include “conventions” (rules) for determining how many months’ worth of depreciation you can claim in the year you first place property in service. The conventions that come into play with equipment are…

The half-year convention. When the half-year convention applies, all property that you begin using during the year is treated as placed in service at the midpoint of the year. This means that no matter when you begin using the property, you treat it as if you began its use in the middle of the year.

Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year’s worth of depreciation on that machine.

The mid-quarter convention. The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40% of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule is out the window, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.

Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year’s worth of depreciation on that machine.

Tip: Don’t neglect to bring any planned equipment purchases to our attention. A careful examination of the timing of planned equipment purchases will allow you to take full advantage of these tax rules.

Please contact SS&C so that we may advise you properly.